Chapter

Accounting for
Receivables

Chapter
9-1

Accounting Principles, Ninth Edition

Study
Study Objectives
Objectives
1.

Identify the different types of receivables.

2.

Explain how companies recognize accounts receivable.

3.

Distinguish between the methods and bases companies use to

value accounts receivable.

4.

Describe the entries to record the disposition of accounts

receivable.

5.

Compute the maturity date of and interest on notes receivable.

6.

Explain how companies recognize notes receivable.

7.

Describe how companies value notes receivable.

8.

Describe the entries to record the disposition of notes receivable.

9.

Explain the statement presentation and analysis of receivables.

Chapter
9-2

Accounting
Accounting for
for Receivables
Receivables

Types of
Receivables
Accounts
receivable
Notes receivable
Other
receivables

Chapter
9-3

Accounts
Receivable
Recognizing
accounts
receivable
Valuing accounts
receivable
Disposing of
accounts
receivable

Notes Receivable

Determining
maturity date
Computing
interest
Recognizing
notes receivable
Valuing notes
receivable
Disposing of
notes receivable

Statement
Presentation and
Analysis
Presentation
Analysis

Types
Types of
of Receivables
Receivables
Amounts due from individuals and other companies that
are expected to be collected in cash.
Amounts owed by
customers that
result from the
sale of goods and
services.

Claims for which

formal
instruments of
credit are issued
as proof of debt.

Nontrade
(interest, loans to
officers, advances
to employees, and
income taxes
refundable).

Accounts
Accounts
Receivable
Receivable

Notes
Notes
Receivable
Receivable

Other
Other
Receivables
Receivables

Chapter
9-4

SO 1 Identify the different types of receivables.

Accounts
Accounts Receivable
Receivable
Three accounting issues:
1. Recognizing accounts receivable.
2. Valuing accounts receivable.
3. Disposing of accounts receivable.
Recognizing Accounts Receivable
The following exercise was illustrated in Chapter 5.
For simplicity, inventory and cost of goods sold have
been omitted.
Chapter
9-5

SO 1 Identify the different types of receivables.

Recognizing
Recognizing Accounts
Accounts Receivable
Receivable
E5-5: Presented are transactions for Wheeler Company.
1.

On December 3,Wheeler Company sold $500,000 of

merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping
point.

2. On December 8, Hashmi Co. was granted an allowance of

$27,000 for merchandise purchased on December 3.
3. On December 13,Wheeler Company received the balance due
from Hashmi Co.
Instructions: Prepare the journal entries to record these
transactions on the books of Wheeler Company using a perpetual
inventory system.
Chapter
9-6

SO 2 Explain how companies recognize accounts receivable.

Recognizing
Recognizing Accounts
Accounts Receivable
Receivable
E5-5: Prepare the journal entries for Wheeler Company.
1. On December 3, Wheeler Company sold $500,000 of
merchandise to Hashmi Co., terms 2/10, n/30, FOB
shipping point.

Dec. 3

Chapter
9-7

Accounts receivable
Sales

500,000
500,000

SO 2 Explain how companies recognize accounts receivable.

Recognizing
Recognizing Accounts
Accounts Receivable
Receivable
E5-5: Prepare the journal entries for Wheeler Company.
2. On December 8, Hashmi Co. was granted an
allowance of $27,000 for merchandise purchased
on December 3.
Dec. 8 Sales returns and allowances
Accounts receivable

Chapter
9-8

27,000
27,000

SO 2 Explain how companies recognize accounts receivable.

Recognizing
Recognizing Accounts
Accounts Receivable
Receivable
E5-5: Prepare the journal entries for Wheeler Company.
3. On December 13, Wheeler Company received the
balance due from Hashmi Co.
Dec. 13 Cash

463,540 ***

Sales discounts
Accounts receivable
*

($500,000 $27,000)

**

[($500,000 $27,000) X 2%]

9,460 **
473,000 *

*** ($473,000 $9,460)

Chapter
9-9

SO 2 Explain how companies recognize accounts receivable.

Accounts
Accounts Receivable
Receivable
Valuing Accounts Receivables
Are reported as a current asset on the balance
sheet.
Are reported at the amount the company thinks
they will be able to collect.
Sales on account raise the possibility of accounts
not being collected.
Valuation can be difficult because an unknown
amount of receivables will become uncollectible.
Chapter
9-10

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically undesirable:
no matching.
receivable not stated at
net realizable value.
not acceptable for
financial reporting.

Chapter
9-11

Allowance Method

Losses are estimated:

better matching.
receivable stated at net
realizable value.
required by GAAP.

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Presentation
Presentation of
of Accounts
Accounts Receivable
Receivable
Assets
Current Assets:
Cash
Accounts receivable
Less: Allowance for doubtful accounts
Merchandise inventory
Prepaid expenses
Total current assets

Chapter
9-12

$ 346
500
25

475
812
40
1,673

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Presentation
Presentation of
of Accounts
Accounts Receivable
Receivable
Assets
Current Assets:
Cash
Accounts receivable, net of $25 allowance
for doubtful accounts
Merchandise inventory
Prepaid expenses
Total current assets

Chapter
9-13

$ 346
475
812
40
1,673

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Allowance Method for Uncollectible Accounts
1. Companies estimate uncollectible accounts
receivable.
2. To record estimated uncollectibles, companies
debit Bad Debts Expense and credit Allowance for
Doubtful Accounts (a contra-asset account).
3. When companies write off specific uncollectible
accounts, they debit Allowance for Doubtful
Accounts and credit Accounts Receivable.
Chapter
9-14

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
E9-6 On December 31, 2010, Jarnigan Co. estimated
that 2% of its net sales of $400,000 will become
uncollectible. The company recorded this amount as an
addition to Allowance for Doubtful Accounts. On May 11,
2011, Jarnigan Co. determined that Terry Fryes account
was uncollectible and wrote off $1,100. On June 12, 2011,
Frye paid the amount previously written off.
Instructions
Prepare the journal entries on December 31, 2010, May
11, 2011, and June 12, 2011.
Chapter
9-15

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
E9-6 Prepare the journal entries on December 31, 2008,
May 11, 2009, and June 12, 2009.
December 31 (estimate)

($400,000 x 2% = 8,000)

Bad debt expense

8,000
Allowance for doubtful accounts

Chapter
9-16

8,000

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
E9-6 Prepare the journal entries on December 31, 2008,
May 11, 2009, and June 12, 2009.
May 11 (write-off)
Allowance for doubtful accounts
Accounts receivable
June 12 (recovery)
Accounts receivable
Allowance for doubtful accounts
Cash
Accounts receivable
Chapter
9-17

1,100

1,100

1,100
1,100
1,100

1,100

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Bases Used for Allowance Method

Chapter
9-18

Illustration 9-5

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Example Data
Credit sales

$500,000

Estimated % of credit sales uncollectible 1.25%

Accounts receivable balance

$72,500

Estimated % of A/R not collected

8%

Existing balance in Allowance for Doubtful Accounts:

Chapter
9-19

Case 1

$150 (credit balance)

Case 2

$150 (debit balance)

SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage of Sales disregards the existing
balance in Allowance for Doubtful Accounts

Credit sales

$500,000

Estimated percentage uncollectible

Estimated bad debt expense

1.25%
$

6,250

Journal entry:
Bad debt expense
6,250
Allowance for doubtful accounts
Chapter
9-20

6,250

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage of Sales
Existing balance (credit)

Case 1

Case 2

(150)

150

Estimated uncollectible

(6,250)

(6,250)

Ending balance

(6,400)

(6,100)

The Allowance for Doubtful Accounts has an ending

balance of $6,400 in Case 1 and $6,100 in Case 2.

Chapter
9-21

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage of Receivables

Accounts receivable

$ 72,500

Estimated percentage uncollectible

8%

Required balance in allowance account

5,800

===================================================
What will be the amount of the adjusting entry?

Chapter
9-22

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage of Receivables
Existing balance (credit)

Case 1

Case 2

(150)

150

Required balance (credit)

(5,800)

(5,800)

Adjustment

(5,650)

(5,950)

Journal entry Case 1:

Bad debt expense

5,650

Allowance for doubtful accounts

Chapter
9-23

5,650

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage of Receivables
Actual balance (credit)

Case 1

Case 2

(150)

150

Desired balance (credit)

(5,800)

(5,800)

Adjustment

(5,650)

(5,950)

Journal entry Case 2:

Bad debt expense

5,950

Allowance for doubtful accounts

Chapter
9-24

5,950

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
When estimating losses using Percentage of
Receivables, companies often prepare an aging
schedule, which classifies customer balances by the
length of time they have been unpaid.
Illustration 9-7

Chapter
9-25

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Summary
Percentage of Sales approach:
Focus on Bad debt expense estimate, existing
balance in the allowance account is ignored.
Method achieves a matching of cost and revenues.

Percentage of Receivables approach:

Accurate valuation of receivables on the balance sheet.
Method may also be applied using an aging schedule.

Existing balance in allowance account considered.

Chapter
9-26

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
Companies sell receivables for two major
reasons.
1. Receivables may be the only reasonable source

of cash.

2. Billing and collection are often time-consuming

and costly.

Chapter
9-27

SO 4 Describe the entries to record the disposition of accounts receivable.

Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
Sale of Receivables
A factor buys receivables from businesses and then
collects the payments directly from the customers.
Typically the factor charges a commission to the
company that is selling the receivables.
The fee ranges from 1-3% of the amount of
receivables purchased.

Chapter
9-28

SO 4 Describe the entries to record the disposition of accounts receivable.

Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
E9-7 (a) On March 3, Cornwell Appliances sells
$680,000 of its receivables to Marsh Factors Inc.
Marsh Factors assesses a finance charge of 3% of the
amount of receivables sold. Prepare the entry on
Cornwell Appliances books to record the sale of the
receivables.
($680,000 x 3% = $20,400)
Cash
Service charge expense
Accounts receivable
Chapter
9-29

659,600
20,400
680,000

SO 4 Describe the entries to record the disposition of accounts receivable.

Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
Credit Card Sales
Retailer considers credit card sales the same as
cash sales.
Retailer must pay card issuer a fee of 2 to
4% for processing the transactions.
Retailer records the sale in a similar manner
as checks deposited from cash sale.

Chapter
9-30

SO 4 Describe the entries to record the disposition of accounts receivable.

Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
E9-7 (b) On May 10, Dale Company sold merchandise for
$3,500 and accepted the customers America Bank
MasterCard. America Bank charges a 4% service charge
for credit card sales. Prepare the entry on Dale
Companys books to record the sale of merchandise.
($3,500 x 4% = $140)
Cash
Service charge expense
Sales
Chapter
9-31

3,360
140
3,500

SO 4 Describe the entries to record the disposition of accounts receivable.

Notes
Notes Receivable
Receivable
Companies may grant credit in exchange for a
promissory note. A promissory note is a written
promise to pay a specified amount of money on
demand or at a definite time.
Promissory notes may be used:
1. when individuals and companies lend or

borrow money,

2. when amount of transaction and credit period

exceed normal limits, or

3. in settlement of accounts receivable.

Chapter
9-32

SO 5 Compute the maturity date of and interest on notes receivable.

Notes
Notes Receivable
Receivable
To the Payee, the promissory note is a note receivable.
To the Maker, the promissory note is a note payable.
Illustration 9-10

Chapter
9-33

SO 5 Compute the maturity date of and interest on notes receivable.

Notes
Notes Receivable
Receivable
Determining the Maturity Date
Note expressed in terms of
Months
Days

Computing Interest

Chapter
9-34

Illustration 9-13

SO 5 Compute the maturity date of and interest on notes receivable.

Recognizing
Recognizing Notes
Notes Receivable
Receivable
E9-10 Orosco Supply Co. has the following transactions
related to notes receivable during the last 2 months of 2010.
Nov. 1 Loaned $15,000 cash to Sally Givens on a 1-year, 10%
note.
Dec. 11 Sold goods to John Countryman, Inc., receiving a
$6,750, 90-day, 8% note.
Dec. 16 Received a $4,000, 6-month, 9% note in exchange for
Bob Rebers outstanding accounts receivable.
Dec. 31 Accrued interest revenue on all notes receivable.
Instructions
(a) Journalize the transactions for Orosco Supply Co.
Chapter
9-35

SO 6 Explain how companies recognize notes receivable.

Recognizing
Recognizing Notes
Notes Receivable
Receivable
E9-10 Nov. 1 Loaned $15,000 cash to Sally Givens on a
1-year, 10% note. Dec. 11 Sold goods to John Countryman,
Inc., receiving a $6,750, 90-day, 8% note. Dec. 16
Received a $4,000, 6-month, 9% note in exchange for Bob
Rebers outstanding accounts receivable.

Nov. 1

Notes receivable

Cash
Dec. 11 Notes receivable

15,000
15,000
6,750

Sales
Dec. 16 Notes receivable
Accounts receivable
Chapter
9-36

6,750
4,000
4,000

SO 6 Explain how companies recognize notes receivable.

Recognizing
Recognizing Notes
Notes Receivable
Receivable
E9-10 Dec. 31 Accrued interest revenue on all notes
receivable.

Dec. 31 Interest receivable

Interest revenue

Chapter
9-37

295
295

SO 6 Explain how companies recognize notes receivable.

Recognizing
Recognizing Notes
Notes Receivable
Receivable
E9-10 (b) Record the collection of the Givens note
at its maturity in 2011.
Nov. 1

Cash

16,500

Interest receivable

295

Interest revenue *
Notes receivable

1,250
15,000

* ($15,000 x 10% x 10/12)

Chapter
9-38

SO 6 Explain how companies recognize notes receivable.

Notes
Notes Receivable
Receivable
Valuing Notes Receivable
Like accounts receivable, companies report shortterm notes receivable at their cash (net)
realizable value.
Estimation of cash realizable value and bad debts
expense are done similarly to accounts receivable.
Allowance for Doubtful Accounts is used.

Chapter
9-39

SO 7 Describe how companies value notes receivable.

Notes
Notes Receivable
Receivable
Disposing of Notes Receivable
1. Notes may be held to their maturity date.
2. Maker may default and payee must make an

adjustment to the account.

3. Holder speeds up conversion to cash by selling

the note receivable.

Chapter
9-40

SO 8 Describe the entries to record the disposition of notes receivable.

Notes
Notes Receivable
Receivable
Disposing of Notes Receivable
Honor of Notes Receivable
A note is honored when its maker pays it in full
at its maturity date.
Dishonor of Notes Receivable
A dishonored note is not paid in full at maturity.
A dishonored note receivable is no longer
negotiable.
Chapter
9-41

SO 8 Describe the entries to record the disposition of notes receivable.

Notes
Notes Receivable
Receivable
E9-13 On May 2, Kleinsorge Company lends $7,600 to
Everhart, Inc., issuing a 6-month, 9% note. At the maturity
date, November 2, Everhart indicates that it cannot pay.
Instructions
(a) Prepare the entry to record the issuance of the note.
(b) Prepare the entry to record the dishonor of the note,
assuming that Kleinsorge Company expects collection will
occur.
(c) Prepare the entry to record the dishonor of the note,
assuming that Kleinsorge Company does not expect
collection in the future.
Chapter
9-42

SO 8 Describe the entries to record the disposition of notes receivable.

Notes
Notes Receivable
Receivable
E9-13 (a) Prepare the entry to record the issuance of
the note. (b) Prepare the entry to record the dishonor of
the note, assuming that Kleinsorge Company expects
collection will occur.

(a)

Notes receivable

7,600

Cash
(b)

Interest = $7,600 x 9% x 6/12 = $342

Accounts receivable

Chapter
9-43

7,600
7,942

Notes receivable

7,600

Interest revenue

342

SO 8 Describe the entries to record the disposition of notes receivable.

Notes
Notes Receivable
Receivable
E9-13 (c) Prepare the entry to record the dishonor of
the note, assuming that Kleinsorge Company does not
expect collection in the future.

(c)

Allowance for doubtful accounts

Notes receivable

7,600
7,600

When there is no hope of collection, the note holder would

write off the face value of the note. No interest revenue
would be recorded because collection will not occur.
Chapter
9-44

SO 8 Describe the entries to record the disposition of notes receivable.

Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Presentation
Identify in the balance sheet or in the notes each
major type of receivable.
B/S

Report short-term receivables as current assets.

Report both gross amount of receivables and
allowance for doubtful account.

I/S

Chapter
9-45

Report bad debts expense and service charge

expense as selling expenses.
Report interest revenue under Other revenues
and gains.
SO 9 Explain the statement presentation and analysis of receivables.

Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Analysis of Receivables
Illustration 9-15

This Ratio used to:

Assess the liquidity of the receivables.
Measure the number of times, on average, a company
collects receivables during the period.
Chapter
9-46

SO 9 Explain the statement presentation and analysis of receivables.

Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Analysis of Receivables
Illustration 9-16

Variant of the accounts receivable turnover ratio is average

collection period in terms of days.
Used to assess effectiveness of credit and collection
policies.
Collection period should not exceed credit term period.
Chapter
9-47

SO 9 Explain the statement presentation and analysis of receivables.

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Chapter
9-48